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The Waste Management, Inc. 1998 Fraud Scandal

Waste Management, Inc. is a comprehensive waste company that was founded in 1894 in North America by Larry Beck. The company went public in 1971 and by 1972, the company was generating about $82 million in revenue and had made 133 acquisitions. The company offered environmental services to almost 20 million customers in America, Canada, and Puerto Rico. In the years of the 1980s, Waste Management, Inc. acquired Service Corporation of America, which led Waste Management, Inc. to become the largest waste management and environmental services company in the country. It was able to manage millions of tons of materials in many different facilities.

Waste Management, Inc. experienced many fraudulent crimes within its company between the years of 1992 and 1997. The senior officers at Waste Management, Inc., which included Dean Buntrock (Founder and CEO), Phillip Rooney (Former President), Thomas Hau (CAO), James Koenig (CFO), Herbert Getz (General Counsel), and Bruce Tobecksen (Vice President of Finance), began to engage in fraudulent activities involving the company’s accounting books. One of the fraud activities that occurred was avoiding depreciation expenses by assigning and inflating salvage values and extending the useful lives of the garbage trucks that the company owned. Every year, depreciation expense must be included in a company’s financial statements as the assets owned become used up and do not have the same value as it originally had. Moreover, another fraudulent activity that occurred with the accounting books was how the officers were refraining from recording expenses for any decreases in the value of the landfills. By doing this, it would state less expenses for the company, when in reality, there should have been more added for this. Next, the officers also refused to record necessary expenses to write off the costs of unsuccessful and discarded landfill development projects. This, in turn, stated less expenses on the company’s financial statements. In addition, the officers assigned salvage values to assets that previously had no salvage values whatsoever. In other words, this would extend the residual value of an asset that originally did not have any. Waste Management, Inc. also increased environmental reserves to avoid irrelevant operating expenses. Netting helped eliminate about $490 million for operating expenses. Another fraudulent activity included improperly capitalizing a variety of expenses. This would defer expenses paid on the books. The company also used geography entries to move millions of dollars between the various line items on their income statement. Ultimately, the company had false profits moving into retained earnings, false assets, and no increase in liabilities on their financial statements. In 1998, Waste Management, Inc. restated its 1992-1997 earnings by $1.7 billion, which made it the largest restatement in history. This created the Waste Management, Inc. 1998 fraud scandal as it is known today.

The reason why the Waste Management, Inc. 1998 scandal occurred was in an attempt to meet predetermined earnings targets by expanding profits and pushing down or foregoing expenses. Revenues were not increasing as fast as they should have been. The chief officers recognized this and began to commit fraudulent activities as aforementioned in order for their financial statements to state what they wanted them to state. In a company such as Waste Management, Inc., officer compensation is tied to the earnings that the company produces. If Waste Management, Inc. were to struggle in falling short of their earnings target, it would endanger the officers of the company. The stakeholders, in turn, looked to committing fraud in order to protect their own lives. Compensation tied to earnings brings about a major culture of fraud in any occupational environment. These officers had the opportunity to commit fraud within the company’s financial statements because they were all high up in the hierarchy of the organization. The founder and CEO, Dean Buntrock, initiated a lot of the fraud and he himself was the company’s own founder. Buntrock, along with the other stakeholders, let greed get in the way of operating the company in an honest and efficient manner.

Because Waste Management, Inc. was a publicly traded company, the company was required to audit their accounting books. They hired Arthur Andersen, one of the Big Five firms, for the audit. Arthur Andersen found errors in Waste Management, Inc.’s accounting books and would come up with adjustments and methods in which they could be fixed; however, the Waste Management Inc. officers refused to make those adjustments that Arthur Andersen proposed. In order for the fraudsters to cover their tracks, the stakeholders bribed Arthur Andersen by telling them that they would receive additional fees outside of the agreement that they originally had made. Arthur Andersen, in turn, issued unqualified opinions in the audit report for Waste Management, Inc. and wrote off the accounting errors over time in order to conceal the fraud. Not only was Waste Management, Inc. committing fraud with their accounting books, but now they were also committing illegal acts by bribing Arthur Andersen.

In fact, Arthur Andersen was not just any sort of auditing firm to the stakeholders of Waste Management, Inc. James Koeing, who was the CFO of Waste Management, Inc., was trained at Arthur Andersen as an auditor. Thomas Hau, who was the CAO of Waste Management, Inc., was trained at Arthur Andersen as an auditor, was a partner there for 30 years, was the engagement partner for the Waste Management, Inc. audit, and was the head of the Arthur Andersen audit division for the Waste Management, Inc. account. Bruce D. Tobecksen, who was the Vice President of Finance at Waste Management, Inc., was the audit manager of the Waste Management, Inc. audit and others at Arthur Andersen. These important chief officers at Waste Management, Inc. all came from Arthur Andersen, who was the company in charge of the audit of Waste Management, Inc. According to the article “Accounting Fraud Rising” by CNN Money, an SEC regulator mentioned that “the relationship is too cozy” between Waste Management, Inc. and Arthur Anderson. According to the article, much of the pressure that the accountants have stems from the cozy relationships that firms have with corporate clients. The article states that, “corporations often hire accountants and other personnel from their auditors and accountants” (Chartier). This cozy relationship between both companies created conflicts in the auditing process of Waste Management, Inc. The stakeholders of Waste Management, Inc. were able to get away with a lot of their fraud because of who their auditor was, in which the relationship between both companies was very close. Arthur Andersen ended up being fined $7 million for the entirety of the Waste Management, Inc. scandal.

As a fraud examiner on this case, there are several recommendations I would propose to Waste Management, Inc. The first thing I would recommend would have been to hire a new Certified Executive Officer. The current CEO was committing fraud in the company. He was committing fraud by letting greed get in his way by tying his compensation and the company’s earnings together. As the CEO of Waste Management, Inc., he has the ultimate authority on management there. If he was managing the company in this way with the financial statements being misstated, a new CEO would have greatly benefited Waste Management, Inc. This new CEO would not allow the company’s earnings to be so intertwined with the officers’ compensation.

Another recommendation I would have would be to hire a different auditor that did not have such as cozy relationship to the officers of Waste Management, Inc. as Arthur Andersen did. Another auditor would have told Waste Management, Inc. what adjustments need to be made to the financial statements, and Waste Management, Inc. would have to follow them without bribing the auditor in any way. A computer software that traced that adjustments would have been beneficial. Constant audit checks of the financial statements would have aided in avoiding the fraud that occurred as well. Other internal controls should have been instituted. Another auditor would have seen several red flags within their audit of Waste Management’s financial statements. Another auditor would have seen that the earnings were consistently meeting the predetermined earnings target. They would have seen that millions in expenses were written off. In addition, another auditor would have seen that there were a lot of outdated fixed assets that Waste Management, Inc. held in their possession.

In order to eliminate the opportunity factor of fraud, other officers such as the CFO and COA that have more direct influence on the financial statements of the company would have had to be replaced, since they were all in on the committing of the fraud at Waste Management, Inc. In order to prevent the fraud in terms of the incentive factor, compensation and the company’s earnings should not have been intertwined. That is what created a culture of fraud within Waste Management, Inc. Additionally, the attitude factor of fraud that included meeting high profits and earnings would have to be eliminated. This would create an incentive for people working at Waste Management, Inc. to create fraud since that attitude of earning high profits and earnings has been instilled in their minds. With it eliminated, people at Waste Management, Inc. would be opposed to creating any sort of fraud.

About Us

Ellrich, Neal, Smith & Stohlman, P.A. was formed in 1988. Based in northern Palm Beach County, Florida, we serve clients throughout the state. The firm’s original founders are W. David Ellrich, Jr. and Becky B. Moore.